WEAKNESSES

Poverty (per capita GDP = 30% of the European average), low priority given to education (3% of GDP)

Dependence on rainfall: agriculture (23% of GDP and 45% of jobs) and hydroelectricity (95% of electricity production)

Weak public investment and lack of infrastructure

Ineffective and politicised court system and administration

Corruption and organised crime

RISK ASSESSMENT

Growth sustained by investment and consumption

Growth is expected to remain high in 2018. It will continue to benefit from continued foreign investment in infrastructure, especially in energy, with the ongoing construction of the Trans Adriatic Pipeline (TAP) transporting gas from Azerbaijan to Italy, and of the second plant (Moglice) of the Devoll river hydroelectric complex. The electrical network should, logically, be developed to ensure internal and external distribution of the expected additional production. These installations will take over from local oil production, which peaked in 2014.

Local investment, particularly regarding the construction or modernisation of roads and railways (Tirana-Durres line) will remain limited by fiscal consolidation and the wariness of banks. The banks, mostly subsidiaries of Italian, Austrian, and Greek banking groups, will continue to reduce the proportion of their non-performing loans (15% in July 2017 versus 21% one year earlier) and the proportion of the euro (around half) in their deposits and loans. Under these circumstances, the recovery of corporate credit should be modest, and the average interest rate on loans in lek and euro (respectively 6.6% and 4.7% in the second quarter of 2017) should remain high, despite a key rate of 1.25% since May 2016. Household consumption is expected to continue to recover due to the increase in transfers of expatriates from Italy, the increase in labour market participation linked to a shrinking of the informal economy and related employment, even if unemployment remains high (14%, 26% of young people). Construction, agriculture (23% of added value), and industry, with their exports benefiting from the Italian upturn, should post good performance figures.

Fiscal consolidation required to reduce the debt burden

After a short pause due to the June 2017 elections, fiscal consolidation will resume. Reserves have been set aside to cover the compensation claims for property expropriated during the Communist era. The cost of the electricity sector to the state is expected to disappear with the installation of meters, infrastructure modernisation, and the gradual end to subsidised tariffs. Pension and territorial administration reforms should also contribute. Tax collection is benefiting from a reduction in undeclared work and from computerisation, while improved management of investments has enabled the elimination of payment arrears to suppliers. This issue is all the more important given that the proportion of debt, although quickly decreasing, remains high: the proportion of domestic debt (53% of the total) is 37% in the short term and is held at 60% by commercial banks, accounting for 25% of their assets.

Substantial trade deficit financed by FDI

There is a very high trade deficit, which stood at 24% of GDP in 2016. This reflects the narrow productive base (textiles, shoes, oil, minerals, electricity, construction materials), which means the country has to import many of its consumer and capital goods. Over half of its exports go to Italy. In addition, the balance is sensitive to rainfall, which can cause hydroelectric power sales to fluctuate. There is a trade surplus in services of 7% of GDP thanks to tourism and outward processing arrangements in the clothing sector. Remittances from emigrants could grow, in line with the Italian economy, but represent around 8% of GDP. The current account deficit is primarily financed by FDI, which means that imports related to infrastructure are self-financing. Despite the importance of the non-debt-creating financing, external debt represented 71.5% of GDP at the end of March 2017. The fact that 80% of the debt is long-term and 56% corresponds to private sector loans, particularly linked with FDI, puts this into perspective.

Reforms are expected to continue

Prime Minister Edi Rama and the socialist party obtained an absolute majority in the June 2017 elections. Structural reforms will continue with a view to obtaining EU membership. In addition to the electricity market, the pension system has been reformed, notably to introduce better proportionality between contributions and benefits. The transcription into law of the 2016 constitutional reform aimed at increasing the independence and efficiency of courts will require the support of the former government partner, the Socialist Movement, for integration. This is crucial as much for accession to the European Union as for encouraging foreign investment. Much remains to be done to improve administrative efficiency, make local agencies accountable, and combat corruption, organised crime, and smuggling between Albania and Italy.